Larry Kravetz
Managing Director, Head of CMBS Finance at Barclays
Where in the capital stack are you most comfortable playing today, and where are you finding the best lending opportunities?
I am most comfortable with senior debt. New loans in this difficult lending environment have structure and pricing that reflect the uncertainty and relative lack of liquidity that we face, but in the end I am more comfortable taking senior debt risk vs. last-dollar risk. Of course, having been a senior lender my whole career, I have a natural bias to be more comfortable there. With respect to lending opportunities, overall transaction activity is pretty light and there aren’t a lot of great lending opportunities. I don’t feel there is a theme here, other than the best lending opportunities are on assets that are well positioned in the current economic environment with strong sponsorship that is realistic about leverage, structure and pricing.
What’s your best piece of advice for borrowers seeking financing during turbulent times?
If you have to finance, be realistic about loan terms in this environment and don’t try to be a market timer. We have seen borrowers opt not to close loans earlier in the year when coupons were much lower, which cost them.
Would you rather finance a well-established sponsor on a Class B office renovation in New York City, or the first-time developer of a multifamily project in the Sun Belt today? Discuss.
Fortunately in this environment, we don’t have the mandate to do either, which makes this purely hypothetical. I learned many years ago that financing a first-time borrower, whether it is an acquisition in a new market, the acquisition of a new property type, or for a first-time development, often ends badly. When it doesn’t end badly, frequently it is because, despite a failed business plan, strong market conditions bail them out. On the other hand, the prospect of living through the financing of a Class B office renovation in New York City is unappealing. My coin toss landed on the multifamily project in the Sun Belt. One important consideration for going that way is that in any market multifamily has more liquidity than Class B office. Furthermore, the macro trends still strongly favor housing in general even with the current slowdown, whereas they certainly don’t favor Class B office, even if renovated.
What’s your take on an impending recession? How bad might it get, and what are any silver linings?
My expectation is that the recession will feel worse than the statistics will bear out, as I don’t anticipate that we will experience the levels of unemployment that we have seen in prior recessions. Commercial real estate typically lags the broader markets in downturns, and I believe the pain of this cycle of value resets and workouts is just beginning to be felt. The closest thing to a silver lining is that the general froth and price appreciation from relatively free money can’t last forever, and what we are going through is an inevitable and necessary part of the economic cycle.
When will we reach the bottom of the market, and when will we see a thawing in the debt markets?
The first real indication that the Fed has stopped tightening should trigger a turn in the market. It looks like that won’t happen until the middle of 2023 at the earliest.
What keeps you up at night, and what helps you sleep?
What has kept me up at night for the past few weeks was knowing that my responses to these questions would be read by many people in our industry. Prior to that, on a professional level, it has been thinking about the best way to navigate through the current environment. What helps me sleep at night is that my days are full and exhausting. In addition, having been in this business for so many years I have learned how to compartmentalize pretty well. That certainly helps.
Lighting Round: Would you rather…
30-day all-haggis diet or extend a suburban mall loan for 3 years?
I don’t think I would survive an all-haggis diet, but I believe I could survive making a loan on a suburban mall if I could choose the one to finance.
Lend on the New York office sector, or take a job as a septic tank repairman?
I had some pretty disgusting jobs in leather factories in my youth, so I know what the septic job would be like. I would opt to lend on the New York office sector under the assumption that I can choose the properties to finance. There will be winners.
Traverse Jurassic Park on foot, or relive 2008?
I survived 2008 and know I could do it again. I don’t know if I could survive traversing Jurassic Park on foot, so I will go with 2008. Can I short the market with the knowledge that I will be reliving it?
Be paid in crypto or Nestle Crunch bars?
I would take crypto and convert it to dollars immediately.
Run a marathon or swim in the Gowanus Canal?
I would run a marathon. My downside in a marathon is that I can’t finish and have sore muscles and joints. Would any sane person swim in the Gowanus Canal?
Be a contestant on “American Idol” or be a contestant on “Survivor”?
I can’t carry a tune and wouldn’t make it past the auditions on “American Idol.” I think I could make it pretty far on “Survivor” and it would be a fun experience, so I will go with that.
Work remote 100 percent of the time or work in an office 100 percent of the time?
Neither. Hybrid is best. If I really had to choose one, it would be work in the office 100 percent of the time. After all, I chose to lend on the New York office sector in a prior question.
